INTERNET: Tencent Slumps Under Government Wrist-Slap

Bottom line: Tencent's sudden pulling of a
popular game just days after its release shows no one is exempt
from Beijing's recent online entertainment clampdown, which could
weigh on stocks of related company for the next few
months.

A new statement from leading
online game operator Tencent (HKEx: 700) is dripping with contrition,
following the sudden yanking of a new hit game from its platform
that apparently didn't pass muster with the regulator. This latest
Tencent news, combined with some downbeat earnings from live
broadcasting specialist Huya (Nasdaq: HUYA) and its parent
YY (Nasdaq: YY), have cast a chill over Chinese
gaming and video stocks, which took a beating in Tuesday
trade.

Tencent has been leading the crowd, shedding 3.4 percent on
Tuesday and down another 3.2 percent in early trade on Wednesday.
Those two declines have collectively wiped out more than $4 billion
in market value from one of the world's most valuable Internet
companies. The bloodbath was felt among the broader realm of
Chinese companies that provide any form of video content over the
Internet, be it games, live broadcasting or even traditional moves
and TV shows.

The biggest loser in the sell-off by far was recently listed
Huya, whose shares tumbled 16 percent after it released only its
second
quarterly earnings report that apparently didn't get people too
excited. Huya was followed closely by its parent, YY, whose shares
fell 13.7 percent. Others who felt similar pain included the
recently listed video site iQiyi (Nasdaq: IQ),
which lost 5.6 percent, and social dating app Momo
(Nasdaq: MOMO), which has found a recent revival in direct
broadcasting and whose shares slipped 8.8 percent on Tuesday.

Tencent's closest gaming rival, NetEase
(Nasdaq: NTES) also lost a more modest 3.5 percent. But you get the
picture, namely that Tuesday was not a pretty day for these online
entertainment Chinese concept stocks.

All that said, let's return to the Tencent news that got this
particular show rolling, which came in the form of an announcement
on its website regarding the popular Japanese-developed game
"Monster Hunt: World". (English
article) Tencent posted the game on Aug. 8, which is a lucky
date because it contains to two eights (8-8), which is a homonym
for "get rich' in Chinese.

Not So Lucky

Seems that date wasn't all that lucky in the end, however, since
Tencent yanked the game from its WeGame platform just five days
later, on the more aptly unlucky date of Aug. 13. It didn't provide
much color on the reasons for the move, except to say that the game
had generated a high volume of complaints. As I've said at the
outset, its note to gamers was dripping with contrition, which
China-watchers can interpret to mean that one or more government
regulators was probably quite displeased about something.

It seems the regulator that must approve all Chinese games for
content hasn't approved any new titles since March, and some are
speculating that Tencent may have violated that unofficial ban with
its "Monster" release. These kinds of unofficial suspensions of new
approvals aren't unheard of in China, though this particular one
does seem to have stretched on for longer than most, of course
without any explanation whatsoever.

As China's 500-pound gorilla in gaming, Tencent must have all
kinds of connections in China's Culture Ministry and other
departments connected with the industry. Thus there's all sorts of
buzz swirling about how it managed to make such a blatant mistake,
prompting it to make such a high-profile and groveling apology.
Again, it does seem like maybe it thought it had gotten some kind
of under-the-table assurance that the game would be approved, and
perhaps had gone ahead and jumped the gun by releasing it early
under that assumption.

Regardless of what actually happened, the bottom line coming
from this particular action is clear: Beijing is closely watching
what online entertainment companies are doing and is prepared to
step in and potentially levy big punishments for those who step out
of line. We've seen plenty of recent examples of that, especially
from the live broadcasting sector that has been in headlines
nonstop with its own rectifications to remove offensive
material.

The fact that even a giant and relatively responsible corporate
citizen like Tencent isn't immune from Beijing's wrath certainly
isn't a good sign for the industry as a whole. We'll have to see
when the suspension of approval of new gaming titles finally ends,
which perhaps will signal that Beijing regulators are finally
easing up on their latest cleanup campaign.